How Could Energy Bills Be Reduced in the UK?

Last week saw the big six energy companies up in front of the Energy and Climate Change Committee and pressure is now being put on them and the government to do something about ever increasing bills. With the average dual fuel bill now coming in at £1468 a year, fuel poverty is becoming a real issue and with Age UK predicting 24000 deaths as the result of cold this winter, how could energy bills be reduced in the UK?

Removing VAT on fuel – VAT is charged at 5% on fuel. VAT is a luxury tax so the question that has to be asked is whether being able to heat your home is a luxury.

Restructure the energy markets – at the moment the bigger energy companies are vertically integrated meaning they are involved in both the generation of energy and the retail business of supplying energy to customers. As a result, companies can move profits into the “upstream” part of their business by selling wholesale energy at inflated prices to their retail arm. This keeps the retail profits lower but means they can still make a healthy profit overall as their upstream business makes a larger profit. It has been suggested that by breaking up the energy companies into generation and retail supply would help make the wholesale energy market more competitive and bring down prices. This is how it was initially after privatisation but eventually the vertically integrated model was adopted after restrictions were lifted that prevented this.

Roll back green taxes – there are a number of “green” taxes imposed on energy companies These include, amongst other things, subsidies for wind farms and solar panels, the introduction of smart meters, the carbon price floor (a carbon tax paid by energy companies) and the Energy Companies Obligation that provides energy efficiency improvements for the fuel poor. It is estimated that these make up approximately 9% of an energy bill. The suggestion made by the energy companies has been to make this element of energy bills part of general taxation which, in theory would mean that investments in renewables and help for poorer households could continue, but what would have to be cut to pay for this or would taxes have to go up?

Restrict profits of the energy companies – this has already been done in Northern Ireland where profits are capped at 2% but Northern Ireland has surplus generating capacity – definitely not something we have in the rest of the UK.

Untaxed energy units – one suggestion that has been made is to have a band of energy units unencumbered by green taxes. So, say the first 1000kWh has no additional tax meaning this will be cheaper and would help the fuel poor who, on average, use less energy anyway.

Remove high usage discounts – many energy companies actually charge less the more energy you use. If the objective is ultimately encourage people to improve energy efficiency and reduce consumption, it would certainly be logical to make units of energy above a certain level MORE expensive rather than cheaper. This would then help keep prices down for the lower users.

Introduce and windfall tax on the energy companies – Suggested by former Prime Minister, John Major, this policy would give some short term relief on bills but the longer term impact may be detrimental as energy companies would stop investing in infrastructure and how would the government prevent the energy companies passing the cost of the tax onto their customers by raising bills further?

Freezing bills for 20 months – a pledge made by Ed Miliband should the Labour party win the next general election. It is estimated that this could save households in the region of £120 but many have questioned its efficacy when the energy companies would be likely to raise prices prior to any freeze.

Make it easier to switch supplier – at the moment it takes up to 5 weeks to switch between providers and only 14% of consumers switch every year. It is still the case that the majority of householders have never switched. Energy Secretary, Ed Davey, announced on 31st October 2013 that his intention was to get switching down to just 24 hours. Whilst this may seem a little ambitious, it wouldn’t be unreasonable to target 1 week in the same way as banks have in recent weeks for moving current accounts. Having said that, energy company First Utility has already started to aim for a 24 hour switch.

Improve energy efficiency measures –This will bring long term savings to households and the lack of insulation in the UK is a big problem. The UK does actually pay below average prices for energy when compared to the rest of Europe, but households in Europe are far more insulated so they don’t need to use as much energy. The existing Energy Company Obligation is flawed in that it requires energy companies to seek out low income households which is expensive. Dr Brenda Boardman, a fuel poverty expert has suggested that low carbon zones should be targeted as a whole on an area by area basis which would be easier to do and would encourage more people to get involved by raising awareness.

There are many ways that energy bills could be reduced in the UK and they certainly need to be explored, but this needs commitment from the government and the energy companies. What the UK must be careful of is taking short term measures that will have a negative impact longer term. This is particularly important in relation to increasing renewable energy resources and improving energy efficiency in homes. Both are long term measures that should ultimately lead to more stable energy costs.

How could energy bills be reduced in the UK – what do you think?

What do you think? We’d like to hear how you think energy bills could be reduced in the UK and whether any of the 10 options listed above you prefer? Post your comments here.